Helping Clients Tackle Personal Debt

As a trusted advisor you are likely to encounter clients that ask your advice on how best to manage their personal debt. While not strictly an accounting issue they will expect that since your profession deals with money that you will be able to advise them in this area.

Since we entering a phase of the long term debt cycle were interest rates rise you can expect that you will be asked questions in this area more frequently. So even though these questions would be better directed to a Financial Advisor, you can give them some general advice that will help your clients find a solution to their debt problems.

The first thing you should advice clients to do is to create an emergency fund. This should typically be 3 months worth of salary and should be kept in a liquid form such as a bank account. The purpose of the emergency fund is to allow some breathing room in the case of an event like an illness that prevents them from earning an income or the loss of a job. This will give you a ready source of cash to pay your bills while you seek a longer term solution to your situation. If they do not have an emergency fund in place they can start accumulating one after following the next two steps.

The next thing is to advise your client to prepare a budget of their monthly expenses. It is amazing how much impact the simple act of writing down all your expenses can have on your personal finances. It will expose all the areas of excess spending and allow the client to make better choices about how they spend their money.

Debt grows when spending exceeds income and the only way of clearing up a debt problem is getting spending to be smaller than income. To do this you need to either increase your income or cut expenses. Cutting the amount spent is almost always the easier of the two.

The third thing you can advise you client to do is restructure their existing debt. Most people would put this as the first thing to do since it is the least painful thing for the client. But that would be a mistake. Doing a balance transfer from a maxed out credit card to one that has zero interest on balance transfers will only postpone the day of reckoning for a client that has not learned to budget and spend less than they earn.

Clients need to understand first that while accumulating debt lets you consume more than you earn and the only way to clear that debt is to consume less than you earn. You may be tempted to jump to this part first since it lets you show your ability with managing numbers but until you are convinced the client has understood that they will have to cut back on their spending you should not be helping them to find the best personal loans.

About craiglebrau

Director of Accounting for Private Educational Institutions at Jefferson+Partners (Sydney) from 2007-2015. Founded and led Lebrau & Partners Pty. Ltd. from 2015 until now - a boutique accounting firm serving educational institutions across the Asia Pacific (both public and private, primary, secondary and tertiary institutions).

I prefer not to disclose social profiles as they delve into my personal life, however please feel free to get in touch via email at [email protected]